While many participants in the European securitisation market have already drawn a line under a terrible year by early December, those at the European Securitisation Forum (ESF) face the prospect of Christmas being cancelled altogether. News emerged in early December that a delegation from the European securitisation industrys trade body had been summoned to speak with EU director of financial services David Wright during the first week of December and tasked with coming up with an action plan to tackle the industrys problems by the end of January.
This marks an upping of the ante between the European Commission and the ESF. David Wright was the keynote speaker at the ESFs recent symposium on European Securitisation Markets, where he said that the Commission would prefer to see a market-led solution, but urgently needs to see a plan to address questions by regulators on transparency and securitisation valuations. Clearly when he said urgently, he meant urgently.
At the November 19 symposium Wright also warned that the commission would be pushed by the political community to intervene in these areas if the market failed to move swiftly. This is interpreted as suggesting that the EU will move to ban certain types of investor from buying European ABS unless the industry cleans up its act with regard to transparency and valuation. One attendee at the December meeting described it as very cross.
To be fair, the ESF has put a great deal of work into these areas in recent years, and has launched many initiatives to try to improve the market. As long ago as 2005 the ESFs Traders Working Group was set up to look into the trading of asset backed securities and to improve its efficiency. It was behind the launch of an ABS valuation service together with Markit in October of that year.
But the EU is now demanding a new action plan - one which is far more wide reaching. The plan must cover the implementation of Basle 2 particularly with regard to Pillar 3 issues of public disclosure and the granularity of information provided by banks complying with the IRB approach. It must also cover both transparency and valuations of both ABCP and term financing. Certain terms in common usage in the market (bid, offer, firesale) must be clearly defined and the Commission wants high level guidelines on how very illiquid securities are priced.
One of the major issues that the EU is concerned about is the accessibility of information, explains Rick Watson, managing director and head of the ESF in London.
Issuers are increasingly making information available without password access and this is something that will continue. The market is now much more of an investors market and their requests are being taken much more seriously than they were before.
The ESF is clearly keen to be seen to be reacting to the crisis in the securitisation market, and issued an exposure draft on a standardised data file format for CDOs on December 12. A similar initiative was launched in the US CDO market in March this year. The idea behind such a move is to allow for more consistency of information and to process data more efficicently. The effectiveness of the US initiative is hard to judge as the market blew up just months later. The ESF is also expected to launch an exposure draft covering standards of post-issuance reporting for the UK non-conforming mortgage market next week. The securitisation market is already transparent but, we are actively reviewing disclosure practices in the ABCP and term ABS, MBS and CDO sectors to see if there are any areas for improvement, says Watson. We are under a lot of pressure from the European Commission. The entire working plan will take time to put together but certain deliverables are expected in January.